- Economists are ringing alarm bells about a likely recession in 2023.
- Insider spoke to five personal finance experts to get their tips on preparing for a downturn.
- Building an emergency budget by changing your spending and saving habits is key, they said.
Alarm bells are ringing in the US economy, with recent models from Bloomberg economists showing a 100 percent chance of a recession next year.
That means it’s probably time to take action to protect your finances.
Insider spoke to five personal finance experts to uncover the key steps to help you bulletproof your finances ahead of a rocky 2023.
1. Build an emergency fund
The experts advised building an emergency fund to cover your expenses if you lose your job.
Ideally, it is enough to finance three to six months of living expenses – a sum that seems unattainable to most.
About two-thirds of Americans can cover a sudden $400 spending, according to the Federal Reserve, but saving between $16,000 and $34,000 for months of spending, based on BLS spending data, is a very different perspective.
Jeremy Schneider, founder of Personal Finance Club, a website that sells financial training courses on budgeting and investing, said if you haven’t saved three to six months on expenses, you need to spend less and save more to get there.
According to Steve Chan, founder of Call to Leap, an educational investment website, getting a budgeting app might be the best way to go. These can help you better visualize and prioritize your spending.
2. Reduce your regular expenses
If you think hard about daily expenses, you can make savings. Such an exercise often requires the least effort and yields the most fruit, said Cameron Huddleston, author and director of Carefull, a security service for older people’s finances.
Bundling your car insurance and home insurance, finding a cheaper cell phone or internet plan, reducing the number of streaming subscriptions you have, and making your own coffee and lunch instead of buying them every day can all prove to be easy wins, around avoid unnecessary expenses.
Paying off your highest-interest credit cards during a time of rising interest rates can be the most effective way to pay off debt before it’s too late, Chan told Insider.
3. Keep bigger expenses in check and get more out of your home
Cost cuts like streaming subscriptions can result in small and worthwhile savings, but expenses like these still pale in comparison to the core strains on our finances.
The cost of running a car is usually more than it needs to be, Schneider said, and can be a major source of debt for many. If there are two vehicles in your household, now might be the time to ditch one and join a car-sharing club, buy a bike or scooter, take public transportation, or walk, Chan suggested.
Emilie Bellet, founder of education funding site Vestpod and host of the Wallet Podcast, urges people to question their spending habits: “When we recognize what specific emotions are driving our impulsive spending, we can make more informed choices.”
Still, housing is the biggest expense for most people and can seriously affect your financial resilience, the experts said.
Huddleston advises homeowners to consider renting out guest rooms or opening them up for AirBnB.
Schneider added, “Your problem is your $650 payment for your truck that’s outside. Your problem is your $2,000 rent. So the options are things like a roommate or downgrading your car.”
Income can also be found from unwanted possessions around the home. “Looking around your house and saying, ‘What can I sell for money?’ is another way to get some cash for little work,” Huddleston said.
4. Look for side hustles
Ahead of a likely downturn, it could be worth taking advantage of a strong labor market that still offers plenty of jobs.
If you have the time, finding extra employment is the quickest way to generate extra income, the experts said. For example, Schneider said, a bar shift that brings in $100 could yield an additional $800 a month in income if you’re able to do two a week.
“After a month, you’re already covering that big expense with new savings,” he said. Dog walking, babysitting, answering paid online surveys and gardening could also help earn extra money, the experts pointed out.
In an age of “overemployment,” remote work, and quiet quitting, Chan said, people are increasingly finding the time to take on extra jobs and side hustles from home.
5. Find sources of passive income
Passive income streams are the holy grail of financial independence. But like Schneider said, it takes work to get them in place.
“Dropshipping” (acting as an intermediary between a supplier and customer), affiliate marketing, and earning advertising revenue from websites are some ways you can build passive income based on your skills with limited effort.
Others buy vending machines or rental properties that can offer ongoing payments.
But Olamide Majekodunmi, founder of All Things Money, a financial literacy blog for millennials, says it’s important not to throw too many upfront costs into passive income streams in hopes that they’ll bear fruit.
And Chan said it still takes a lot of work to get to a point where you can enjoy residual income. He makes money from old videos that are uploaded to social media and still watched today.
6. Continuing education
The negative effects of a recession, such as falling incomes and higher unemployment, may not become apparent until several months after the downturn begins. That leaves plenty of time to build a new monetizable capability, Schneider said.
Learning search engine optimization, content writing and user experience design, for example, are skills that are in demand by businesses and offer many freelance opportunities, Huddleston and Schneider said.
“There are so many free online courses now that you can take to improve those skills anyway,” Majekodunmi told Insider.
7. Wire extra income to a hard-to-reach savings account
Once your finances are on better footing, to resist the temptation to spend, you should start automatically transferring your extra income to a savings account you don’t have readily access to, Huddleston said.
“Have that amount, the total amount you’re saving from all those ways to cut your expenses in half, that’s automatically going into a savings account,” he advised.
8. Don’t Panic!
The worst thing to do with a looming downturn is to rush into action, the experts told Insider. Now is the time to make sure your financial fundamentals are on the right track. This means not withdrawing money from investments.
“If you’re an existing investor, it’s important not to panic and focus on long-term goals. Keep investing — remember, regular investing works over a long period of time,” Bellet said.
Don’t try to pack in all of these suggestions at once or you might get overwhelmed, Chan added. “Start downloading a budgeting app this week, then pay off a credit card in two weeks. The rest will follow.”
Schneider said households must try to keep spending below income and increase savings no matter how the overall economy performs.
“A habit of what wealthy people do is they don’t think about that week,” he said. “You’re thinking six months or a year or five years from now.”